uncertainty-240px-77743241There are numerous uncertainties in the marketplace currently facing businesses. Tax laws could substantially change as President Trump and Republican congressional leaders work toward fulfilling their campaign promises. The estate tax could be repealed, and various laws and regulations (including the Dodd-Frank and Affordable Care Acts) could be repealed or revised, and interest rates and inflation could both rise. Economic relationships with other countries could also change. Some of these changes could be good for your business, while others could have negative effects on the value of your business.

History Lesson

Business owners and investors are no strangers to dealing with market uncertainties, and neither are business valuation professionals. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.

Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.

Key Considerations

When valuing a business in today’s volatile political climate, here are some things to consider.

Company-specific risks. The risk associated with specific companies and industries is a factor that has changed substantially, and valuators face challenges as they attempt to measure these risks. For example, proposed regulatory changes might increase the value of companies that operate in the energy sector or the manufacturing sector. On the flipside, they might adversely affect the value of companies that operate in the government contracting or health care sectors.

Public market returns. The inputs that valuators use are typically based, in part, on data from the public stock and bond markets to determine discount rates and pricing multiples. So far, public markets have reacted to the election results in a positive manner. In general, the proposed changes to taxes and business regulations are likely to lower expenses and increase cash flow for many businesses.

Known (or knowable) information. Valuation experts can only use information known or knowable at the date of the valuation. Many private business valuations are prepared with a year-end effective date, because it corresponds to the cut-off date for their annual financial statements. But what did we know as of December 31, 2016?

Market conditions are constantly monitored by valuation experts. However, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.

Contact a Valuation Professional

In today’s marketplace, experienced appraisers understand that politicians have many divergent plans that may (or may not) be approved or take effect. They understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response.

A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future. Business owners and investors should stay calm and carry on.